If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Shenzhen Keanda Electronic Technology (SZSE:002972) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shenzhen Keanda Electronic Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.099 = CN¥128m ÷ (CN¥1.5b - CN¥249m) (Based on the trailing twelve months to March 2023).
Therefore, Shenzhen Keanda Electronic Technology has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.0%.
View our latest analysis for Shenzhen Keanda Electronic Technology
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Keanda Electronic Technology's ROCE against it's prior returns. If you'd like to look at how Shenzhen Keanda Electronic Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of Shenzhen Keanda Electronic Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 25% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
Our Take On Shenzhen Keanda Electronic Technology's ROCE
We're a bit apprehensive about Shenzhen Keanda Electronic Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 10% in the last three years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you want to continue researching Shenzhen Keanda Electronic Technology, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Shenzhen Keanda Electronic Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.